How Are Taxes Taken Out of Your Paycheck: W-4 to W-2

Every paycheck arrives smaller than your gross earnings because your employer removes several taxes before the money hits your account. Here is how taxes are taken out of your paycheck: federal income tax based on the W-4 you filled out at hire, a flat 6.2% Social Security tax and 1.45% Medicare tax under FICA, and in most places a state income tax, with some cities and counties adding a local tax on top. Pre-tax benefits like a traditional 401(k) or health insurance premiums come out first and shrink the wages those taxes apply to.

The Order Deductions Come Off Your Gross Pay

Your gross pay is the starting number. From there, pre-tax benefit contributions come off first, which lowers the wage figure your employer uses to calculate federal income tax withholding. Then FICA taxes are calculated on your gross wages (with a narrower set of pre-tax items excluded), and state and any local income taxes are withheld under their own rules. What’s left is your net pay.

Each of these lines shows up separately on your pay stub, and knowing which one is which is the fastest way to tell whether your paycheck looks right.

Pre-Tax Deductions That Lower Your Taxable Wages

Before your employer calculates income tax withholding, certain benefit contributions come off the top. These pre-tax deductions reduce the wages that show up in Box 1 of your W-2, which means federal income tax gets applied to a smaller number. The most common are contributions to an employer-sponsored retirement plan like a 401(k) and premiums for employer-provided health insurance.¹

For 2026, you can defer up to $24,500 into a traditional pre-tax 401(k).² If your employer offers a Health Savings Account and you have a qualifying high-deductible health plan, you can contribute up to $4,400 for self-only coverage or $8,750 for family coverage in 2026.³ Every dollar you put into these accounts is a dollar your employer doesn’t withhold federal income tax on.

One distinction matters. Traditional pre-tax 401(k) contributions avoid federal income tax withholding, but Roth 401(k) contributions do not. Roth contributions are made with after-tax dollars, so they stay in your taxable wages for withholding.¹ Both types of 401(k) contributions remain subject to Social Security and Medicare taxes.

Federal Income Tax and Your W-4

When you started your job, your employer had you fill out IRS Form W-4, officially the Employee’s Withholding Certificate.⁴ The form captures your filing status, credits for dependents, income from other jobs or a working spouse, and any extra withholding you want. Payroll software feeds those inputs into the withholding tables in IRS Publication 15-T, which are organized by pay frequency and filing status.⁵ The system takes your adjusted wages for the pay period, annualizes them, applies the progressive tax brackets, and divides the result back down to the pay period.

The federal system is progressive, so each layer of income is taxed at its own rate. Crossing into a higher bracket does not push all your earnings to that rate.⁶ For a single filer in 2026, the brackets are:⁷

10% on income up to $12,400
12% on $12,401 to $50,400
22% on $50,401 to $105,700
24% on $105,701 to $201,775
32% on $201,776 to $256,225
35% on $256,226 to $640,600
37% above $640,600

Married couples filing jointly get roughly double the bracket widths. Someone earning $80,000 does not pay 22% on the whole amount. They pay 10% on the first $12,400, 12% on the portion up to $50,400, and 22% only on what’s above that. That layered structure is why your effective rate is always lower than your top bracket.

Getting the W-4 right matters. Claim too little withholding and you’ll owe money in April, possibly with an underpayment penalty. Claim too much and you’ve made an interest-free loan to the government all year. The IRS Tax Withholding Estimator walks through your situation and tells you what to put on the form.⁸

How Bonuses and Commissions Are Withheld

Supplemental wages like bonuses, commissions, and severance follow different rules. Employers can apply a flat 22% federal withholding rate on supplemental pay instead of running it through the regular bracket calculation.⁹ If your supplemental wages for the year exceed $1 million, the mandatory rate jumps to 37% on the excess.

That is why bonuses often feel more heavily taxed than regular pay. A flat 22% can be higher or lower than what you’d actually owe depending on your bracket, and the difference gets sorted out when you file. Over-withholding on a bonus comes back as part of your refund.

Social Security and Medicare (FICA) Taxes

Separate from income tax, every paycheck has Social Security and Medicare taxes withheld under the Federal Insurance Contributions Act. These rates do not change based on filing status, dependents, or anything on your W-4. They are flat percentages on your gross wages.

Social Security tax is 6.2% of wages up to $184,500 in 2026. Once your year-to-date earnings pass that cap, Social Security withholding stops for the rest of the year and your take-home pay rises. The maximum an employee will pay in Social Security tax for 2026 is $11,439.¹⁰

Medicare tax is 1.45% of all wages with no cap. If you earn more than $200,000 in a year, or $250,000 for married couples filing jointly, an Additional Medicare Tax of 0.9% applies to wages above that threshold.¹¹ Your employer withholds the extra 0.9% once your wages pass $200,000 regardless of filing status, so married filers with the different threshold may need to settle up at tax time.

Your employer also pays a matching 6.2% for Social Security and 1.45% for Medicare on your behalf. That share does not come out of your paycheck and will not appear on your pay stub.

State and Local Income Tax

Most states impose an income tax on wages, and your employer withholds that too. Nine states do not tax wage income at all; the remaining 41 states plus the District of Columbia do. Among the states that tax wages, about 14 use a single flat rate while the rest use graduated brackets similar to the federal system. State rates run from around 2.5% at the low end to over 13% at the top.

Your employer usually needs a separate state withholding form in addition to the federal W-4. Some states accept the federal form, but most have their own. If you live in one state and work in another, both states may have a claim on your wages, though reciprocity agreements between some neighboring states can simplify that.

Roughly 16 states also allow cities, counties, or school districts to impose a local income tax. Local rates generally run from fractions of a percent up to about 3.5% of earnings. If your workplace sits in a jurisdiction with a local tax, your employer typically withholds that amount as well. Check your pay stub for any local line items you don’t recognize.

Reading Your Pay Stub

Your pay stub is the receipt for everything above. Gross pay sits at the top; net pay sits at the bottom; everything between is deductions. The deductions section lists each tax as its own line: federal income tax, state income tax if applicable, Social Security tax, and Medicare tax. You’ll also see separate lines for pre-tax benefits like health insurance premiums and retirement contributions. Most stubs show year-to-date totals next to each category so you can track what’s been withheld since January.

Look at the stub at least once after submitting a new W-4 and once early in the new year. Confirm the filing status matches what you chose and that the deduction amounts look reasonable for your income. Catching a payroll error in February is far less painful than finding it the following April.

When to Update Your W-4

A W-4 is not a one-time form. The IRS recommends revisiting it whenever you experience a significant change: getting married or divorced, having a child, starting a second job, or having a spouse enter or leave the workforce.¹² Update it too when you become eligible for new tax credits or start itemizing instead of taking the standard deduction.

If you receive substantial income that isn’t subject to withholding, such as freelance payments, investment gains, or rental income, line 4(a) of the W-4 lets you have extra tax pulled from your paycheck to cover it.¹² That is often simpler than making quarterly estimated payments. The IRS Tax Withholding Estimator can tell you whether your current withholding is on track or needs adjusting.⁸

Year-End: Your W-2

By February 1 of the following year, your employer must give you Form W-2, which summarizes what was earned and withheld during the prior tax year.¹³ The boxes worth checking against your final pay stub are:

Box 1, total taxable wages after pre-tax deductions
Box 2, federal income tax withheld
Box 4, Social Security tax withheld
Box 6, Medicare tax withheld, including any Additional Medicare Tax

These numbers flow directly onto your federal tax return.¹³ Box 2 is compared against your actual tax liability for the year. If more was withheld than you owe, you get a refund; if less, you owe the difference. Compare your final pay stub’s year-to-date figures to the W-2, and if something doesn’t line up, raise it with your employer before you file.

1
Internal Revenue Service. Retirement Plan FAQs Regarding Contributions
2
Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026
3
Internal Revenue Service. Notice 26-05 HSA Inflation Adjustments
4
Internal Revenue Service. About Form W-4, Employee’s Withholding Certificate
5
Internal Revenue Service. About Publication 15-T, Federal Income Tax Withholding Methods
6
Internal Revenue Service. Federal Income Tax Rates and Brackets
7
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
8
Internal Revenue Service. Tax Withholding Estimator
9
Internal Revenue Service. Publication 15-T (2026), Federal Income Tax Withholding Methods
10
Social Security Administration. Contribution and Benefit Base
11
Office of the Law Revision Counsel. 26 USC 3101 – Rate of Tax
12
Internal Revenue Service. FAQs on the 2020 Form W-4
13
Internal Revenue Service. 2026 General Instructions for Forms W-2 and W-3